What’s in the Cards for AT&T (T) This Earnings Season?

In two of the previous four quarters, the company’s bottom line met the Zacks Consensus Estimate. Earnings outpaced the Zacks Consensus Estimate in one of them, with an average beat of 1.36%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

AT&T’s wireless growth opportunities from the launch of standards-based mobile 5G services in 2018 and the FirstNet project look impressive. The project is the first dedicated nationwide wireless network for first responders, which is likely to drive the company in 2018. Recently, AT&T and the First Responder Network Authority (FirstNet) revealed the inclusion of 50 states, two U.S. territories and Washington DC in the FirstNet project.

Since 2017, AT&T has been striving to lay the foundation for mobile 5G network. The company has completed network upgradation in 23 major cities. Notably, the completion of 3rd Generation Partnership Project’s (3GPP) first implementable 5G New radio (NR) specification has set the stage for the global mobile industry to initiate full-scale development of 5G NR for large-scale trials and commercial deployments in 2019.

AT&T’s move to raise quarterly dividend by 2% to 50 cents per share (annualized $2.00 per share) is encouraging. The dividend will be paid on Feb 1, 2017 to shareholders of record as of Jan 10, 2018. This marks the 34th annual dividend hike by the company. The hike was backed by strong cash flows and business outlook. Notably, in third-quarter 2017, AT&T generated $11,114 million of cash from operations compared with $10,995 million from the prior-year quarter. Free cash flow in the reported quarter was $5,863 million compared with $5,182 million in the year-ago quarter. Management expects free cash flow to be enough to pay debt and return cash to shareholders. It is to be seen whether the company will be able to continue to garner strong cash flow in the upcoming quarter.

In December 2017, AT&T’s over the top (OTT) online streaming service — DIRECTV NOW — reported more than 1 million subscribers, despite cord-cutting. The company reported a net gain of approximately 0.213 million DIRECTV NOW connections, since Sep 30, 2017. It is to be seen whether the company can maintain subscriber gain in the to-be-reported quarter.

Further, AT&T and Verizon teamed up with Tillman to build cell towers in the United States. AT&T’s NetBond is gearing up to offer multiple cloud connections. AT&T is exploring a strategic option to sell a major part of its Latin American pay-TV operations.

Backed by such prospects, AT&T’s shares have returned 10.4% compared with the industry’s rally of 4.9% in the past six months.

On the flip side, AT&T continues to struggle in the competitive and almost-saturated U.S. wireless market with incumbents like Verizon Communications Inc. VZ, T-Mobile US Inc. TMUS and Sprint Corp. S. The industry is likely to witness more competition in 2018 with the entry of cable MSOs (multi service operators). Comcast already entered this space with Xfinity Mobile offering. Charter Communications reiterated its plans of launching wireless service in the first half of 2018. Adoption of several unlimited data plans resulted in a reduction of wireless service revenues and average revenues per user (ARPU).

Moreover, AT&T’s wireline division suffers from persistent losses in access lines, thanks to competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies. These are likely to weigh on the company’s revenues and margins.

Operating expenses, marketing costs associated with attractive discounts, regulatory norms and union issues are other headwinds. Regulatory hurdle for the pending AT&T-Time Warner deal has become a major concern for the telco. This is the fourth instance when the company has changed the closure date to Jun 21, 2018 to clear regulatory issues.

Earnings Whispers

Our proven model does not conclusively show that AT&T is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: AT&T has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 65 cents. You can uncover the best stocks to buy or sell before they’re reported with the Earnings ESP Filter.

Zacks Rank: AT&T has a Zacks Rank #3 which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The company’s sales for fourth-quarter 2017 and first-quarter 2018 are estimated to increase 32.6% and 42.9%, respectively.

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